I think you’re wrong. If the parents pay back their electricity infrastructure loan, they have two children and then die, their children don’t have to pay off the loan again. If they have more than two children, or if a new immigrant arrives, then current loans per capita do increase.

I think you’re totally wrong about workers too. I’ve given reasons for my position. What are yours?

On Friday, Fair Work Australia raised wages for the low-paid by 3.4%, drawing predictable criticism from the Right.

“It is a very blunt blow on small businesses,” said Peter Anderson, CEO of the Australian Chamber of Commerce and Industry [http://is.gd/hDMmy7]. Anderson was quick to characterize the decision as bad news for workers: “It really is going to be a Pyrrhic victory, particularly for those working people who are working in smaller businesses that are going to find it difficult to put this wage increase into the wages budget. And one of the responses of those businesses will be to reduce working hours to make the wages bill fit in the wage budget.”

Michael Stutchbury in the Weekend Australian chimed in [http://is.gd/pvmzeL], claiming that the ensuing inflationary pressure would “encourage the Reserve Bank to lift its official interest rate”, thereby “wiping out the benefit” of the wage rise for many households.

The wage rise was 3.4% for workers on up to three times the minimum wage. No such cap applies to payroll tax, which adds about 5% to the cost of hiring an extra worker for employers whose payrolls are above the threshold. And neither that cap nor that threshold applies to the Superannuation Guarantee (SG), which adds 9% plus compliance costs — to be increased to 12% plus compliance costs before this decade is out.

Although the SG is mandated by the Federal Government, it isn’t classified as a tax because it isn’t paid to the Government; it’s a compulsory transfer of income within the private sector. That keeps it “off-budget,” so that the Government’s economic footprint looks smaller than it really is.

In all other respects, however, Australia’s federally mandated, employer-funded 9% superannuation contribution is equivalent to a federally-funded 9% contribution (whereby the highest-paid workers get the biggest subsidies to their saving) funded by a 9% federal payroll tax. As the late Milton Friedman said in the corresponding American context [http://is.gd/poe4nb], “You cannot conceive of that tax being enacted by itself…” and “you would never enact a subsidy program in which the largest subsidies go to the people who have earned the highest incomes. Yet when you tie the two together you have a sacred cow.”

Friedman also said [http://is.gd/pfftax] that “the least bad tax is the property tax on the unimproved value of land”. I have estimated that if the “least bad tax” were applied to the broadest possible base, a rate of 0.6% per annum would replace payroll tax, while a rate of 1.75% per annum would finance the SG [http://is.gd/iwpoqie].

I focus on payroll tax and the SG because, unless something is done to reduce the cost of hiring, especially at the entry level, the belt-tightening induced by the bursting of the housing bubble will cause a blowout in unemployment. But that raises a problem: as soon as the property lobby and the mainstream media can no longer deny that the market has crashed, they will inevitably blame land tax without admitting that, by their own logic, a higher and broader land tax would have prevented the bubble from forming in the first place.

Accordingly I offer a less radical scheme, which could be implemented at short notice and without credible opposition, whereby employers offering entry-level jobs would no longer be slugged for payroll tax and super contributions on top of the wage bill.

* Payroll tax would be DISAGGREGATED; that is, the taxable unit would be the individual employee. The threshold would be applied to the individual wage or salary, and pro-rated for part-time workers (to prevent avoidance through proliferation of part-time employment). Whereas the old system is progressive with respect to employers, the new one would be progressive with respect to employees: if each of your employees earns less than the threshold, you would pay no payroll tax. The States and Territories could enact this reform on their own initiative, or the Commonwealth could force them to do so on pain of losing their GST revenue.

* The SG, which is already disaggregated, would be taken “on budget” — that is, officially redefined as a federally-funded super contribution funded by a disaggregated federal payroll tax, which might be called the “SG levy”. This levy would be made progressive by introducing a threshold (again pro-rated for part-timers). If each of your employees earns less than the threshold, you could simply forget about super. (Of course there is no reason why the federally-funded contribution should be proportional to the worker’s wage or salary; but that issue will not be further considered here.)

What would the rates and thresholds be? Let’s do the sums for 2007-8, this being the latest financial year for which the Australian Bureau of Statistics has figures on the distribution of wage-salary income.

We start with the revenue requirements. In 2007-8, payroll tax in all States and Territories raised a total of $16,022 million (according to ABS 5506.0), while the total wage/salary income of Australian workers was $518,839 million (ABS 5204.0, Table 6), of which the SG should have raised slightly less than 9%, i.e. $46,696 million (“slightly less” because of contribution caps and the $450/month threshold).

Now we consider the tax base. From ABS 5673.0.55.003 (Cube 5A, Table 8), we find the numbers of Australian workers in various wage/salary brackets for 2007-8. If we paste these into a spreadsheet, we readily obtain the number, hence the percentage, of workers above each income threshold. For each threshold, the corresponding percentage of total wage/salary income can then be read from the “Salary and wages” Lorenz curve in Chart 3.9 [http://is.gd/KTMNS6] of the Treasury paper “Architecture of Australia’s tax and transfer system”. (This chart is for 2005-6, but is applicable to 2007-8 provided that the wage/salary relativities didn’t change too much in the mean time.) Each income percentage can be converted to an income total (for workers above the threshold). Then, for each threshold, we multiply the number of workers by the threshold to obtain the sub-threshold component of the income total. By subtraction we then obtain the above-threshold component, which is our tax base if that threshold is used for the disaggregated payroll tax or the SG levy.

Then, as usual, we divide the required revenue by the tax base to obtain the rate. By my calculations, the SG levy would have required a rate of 21.5% with a threshold of $41,600 (per annum), or 28.4% with a threshold of $52,000. The disaggregated payroll tax would have required a rate of 9.7% with a threshold of $52,000, or 16.5% with a threshold of $67,600.

These results are for 2007-8. They err on the pessimistic side because they don’t allow for the pro-rating of thresholds for part-time workers. The results for payroll tax are for Australia as a whole, and should be roughly representative of the several States and Territories. (Without access to Lorenz curves of wage/salary income for individual States and Territories, I can’t say precisely how much the State/Territory rates would deviate from the national rate.)

Nationwide, this proposal would only raise the same revenue as the current payroll tax and SG, which it would replace; and it would raise that revenue from the same group of taxpayers, namely employers. Hence it would cause no overall increase in prices. It would have no impact on employees’ take-home pay except through its influence on future hiring decisions. That influence would make entry-level jobs easier to get — and indeed would make the majority of voters more employable without reducing their take-home pay. The superannuation industry should jump at the idea because it would make super contributions rise faster than wages and salaries, due to bracket creep. State governments should jump at it because the higher marginal rate of payroll tax would increase the effect of bracket creep, giving more frequent opportunities to hand back bracket creep under the guise of tax cuts. Right-wing commentators should embrace it if their professed desire to make the poor more employable is genuine and is not simply a smokescreen for class warfare.

P.S.: It has come to my notice that at least one reader has misinterpreted my proposal as implying that the poor wouldn’t get any super contributions. I didn’t say that. I merely said that super contributions would be “funded by a disaggregated federal payroll tax… made progressive by introducing a threshold…”

I added: “Of course there is no reason why the federally-funded contribution should be proportional to the worker’s wage or salary…” That was intended as a hint that the system could be made still more progressive. Up to that point, I would have expected readers to assume that the super contribution received by each worker would remain at 9% of the wage/salary.